Change to Brexit — deal or no deal?

The U.K. is scheduled to depart the European Union (EU) on 29 March 2019. To ensure an orderly exit, a settlement must be reached by October 2018, plus an outline agreement on a future EU partnership, focusing particularly on trade, travel and security.

To buy more time for preparation the “two sides” have agreed a 21-month transition period. Free movement, as defined under EU law, of people, goods and capital will continue during this period, up until 1 January 2021.

For the U.K. and the EU insurance sectors the Brexit challenge is unprecedented. The fundamental industry issue concerns “passporting” rights, permitting insurers regulated in an EU country to do business in another EU country with minimal regulatory scrutiny. These rights are commonly referred to as the Freedom of Establishment and the Freedom to Provide Services.

Unless a post-Brexit trade agreement allows the continuation of passporting, or something similar, then significant disruption could occur. This is because no one yet knows the regulatory status, on the day after Brexit, of re/insurance contracts written in UK branches before Brexit (on an inbound branch passport basis) or similarly in other EU member states (outbound).

The U.K.’s Financial Conduct Authority (FCA) estimates that ten million U.K. policyholders and 38 million European Economic Area (EEA) policyholders could be affected if all U.K. - EU passporting rights are lost. Under a “no deal” Brexit, U.K. regulations would not be treated as equivalent to the applicable EU rules, e.g. Solvency II, and vice versa.

Market commentators have routinely expressed a view that a “no deal” equivalence status would have serious repercussions for the London Market. Inga Beale, outgoing Lloyd’s CEO, has warned many U.K. insurers could relocate to the EU if a “mutual market access” deal is not reached.

Over the last year, several insurers and brokers have prepared for such an eventuality. There appears to be two ways they are doing this. The first is for U.K. insurers to establish locally-regulated and Solvency II-compliant companies in EU member countries to allow ongoing EU/EEA compliance. As a result, they will likely also have to consider and transact portfolio transfers to these new EU/EEA entities.

Others have applied to the UK’s Prudential Regulation Authority and the FCA for their current U.K. entities to be authorized as a Third Country Branch, to take effect when the U.K. exits. Using this method, policies and claims issued pre-Brexit can be administered in either the UK or EU/EEA as required, with full regulatory compliance.

Because of these preparations, a “no deal” or hybrid-deal Brexit is unlikely to have a major impact on how international programs work. However, it may be that clients will require two policies i.e. a U.K. policy and an EU/ EEA FOS policy, as part of an effective and compliance international program.

There is also unlikely to be any significant disruption from a loss adjusting perspective. Crawford has a mature and capable European and international network, together with the program and relationship management expertise of our Global Client Development Team. This will continue and thrive whatever is decided during the ongoing Brexit negotiation process.

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